Empty Lot Money Pit

44 Replies

I only posting this for general thoughts and hope there is something I haven't thought of. I am not asking for legal advice just opinions if you were me. Any feedback would be appreciated. 

Ok here's my little situation. In 2007 purchased an 7.7 acre "estate lot" in the new Jacksonville Ranch Club equestrian community. Like most people I didn't realize the real estate bubble would pop and thought it would be a great investment. I financed the lot with a conventional loan thinking I would be easy to resell. 

Paid 175,000.00   Its on a 10 year loan at 6.5 interest.   I still owe 110,000 today with a 1,700 monthly payment. 

A lot of investors purchased land there and are in the same situation. A few families have build homes but its mostly a nicely planned out ghost community. 

I had it for sale since I purchased it. It is only worth maybe 40k. I could keep paying and hope for the best. I could reach out to builders and try and negotiate a deal for a spec home (risky). I have offered owner financing but that difficult on a lot.

How would a savvy investor turn this sinking ship around?

My best man and his wife bought a lot there in '07 or '08 as well. I think theirs was half the price and a third of the size, but still was an equally awful investment. They bought thinking they might build and live there, but that area hasn't developed as planned and they ended up getting an amazing foreclosure which helped ease the pain of this one. They even lost more money when they bought a $5k tractor to clear the lot and it broke down. Got a judgment in small claims court against the family that sold it to them but they'll likely never see the money lol. 

Anyway, I tell this story just to say that they haven't found a way out either. They've been paying HOAs and taxes and praying for the market to rebound. They paid cash so their situation is a little simpler, but still difficult. 

Good luck! :/

@James Floyd    Oh, brother, I feel your pain!

I’m not familiar with real estate prices in the Jacksonville, Florida area, so I’ll accept your numbers:You paid $175,000 for an estate lot that is worth $40,000 today.That’s a loss of $135,000.  Assuming that the property appreciates at 5% per annum, it will take 30 years before the lot is again worth $175,000. I am also assuming that the lot is in a subdivision that is governed by a Property Owners’ Association and that the subdivision lots are restricted to single family dwellings.

I can’t think of any near term scenario where you can break even on this property. The real question is when and how will you liquidate the property and take the loss. You can either take the loss now by selling it for $40K and bringing $60K to the closing table to pay off the mortgage or you can pay off the loan (only 3 more years of mortgage payments!) and defer the loss to some future date.

It’s unlikely that you will be able to break even on the lot by partnering with a spec builder. After all, why should the spec builder partner with you when he could simply buy some other estate lot for a much cheaper price?

Of course, a lot can happen in 10 or 15 years.  I’ve seen $10K lots in Houston (West U, Bellaire, Oak Forest, etc) appreciate to $250 and much more over a 10 to 15 year period.

Good luck. I wish you well.

ask the lender for a short sale.  You may need to have the balls to go delinquent before they play with you.

Ouch! I thought this was a friendly forum. Just kidding. I would like to avoid a short sale and figure out a better way to get rid of this albatross. Call me old fashion but I don't want a short sell on my credit reports.

As Maxwell mentioned a lot of people bought into this community. Some are biting the bullet and building there. My wife hates that option. 

Thanks again for responses. Maybe someone has a trick up their sleeve. 

I knew this guy that bought an albatross of a property in Philly. It was an old galvanizing plant, Damned place was a toxic wonderland. So he went bad on the mortgage, and the lender foreclosed and took the property back. When they opened the doors, they discovered the place was full of trash and demo debris. Building was almost an acre under-roof and 25 feet to the bottom of the roof trusses. 

@James Floyd if you can't work something out with the lender, walk away, and get busy dealing with the fallout. Sooners better than later. Unless you can see something in that market taking off and getting prices to skyrocket and homes start selling for at least $600k in the subdivision. 

Originally posted by @Karen Margrave :

@James Floyd if you can't work something out with the lender, walk away, and get busy dealing with the fallout. 

 I agree !!!

The $1,700/month you are throwing at this would buy a lot of recovery investment, regardless of the hit on your credit. The latter would be a lot easier for me to swallow & recover from than the ongoing cost(s) you are saddled with.

Good luck

Originally posted by @James Floyd :

Ouch! I thought this was a friendly forum. Just kidding. I would like to avoid a short sale and figure out a better way to get rid of this albatross. Call me old fashion but I don't want a short sell on my credit reports.

As Maxwell mentioned a lot of people bought into this community. Some are biting the bullet and building there. My wife hates that option. 

Thanks again for responses. Maybe someone has a trick up their sleeve. 

 I agree with you 100%.  Short sale might be the best way to go for others but you have to make that decision.  

I bought a three family for 714k in June of 2007.  In 2008 I had two empty apartments an abandoned neighboring property housing a 6'8" transsexual hooker with a tendency towards violence, and a drug habit.  She would often stand out front of the house and scream at some other druggie for one reason or the other til the cops came. 

I tore a tendon in my elbow needing surgery and had to quit my second job.  I was drowning in debt and mortgage payments and everyone was talking about short sale-especially my accountant and lawyer. I told them something similar to what you said above.  

Another neighbor who thought I had money offered to sell me his house-just like mine for 400k.  

I held onto my house, my only regret is I didn't buy that house for 400k. Now they are both worth much more. 

Your situation while different seems worse at this piont but there is no trading for self esteem. If your able to hold on I would too.  

As Oliver Velez (swing trader) says you look at your stocks (in this case real estate) as an employee. If you had an employee hurting your business and costing you money what would you do ?  Of course fire them. The same way this land is costing you money and hurting your future investments. If you can afford to liquidate it then go for it if not short sale or another means pronto

Talk to your accountant about tax consequences/benefits of selling

Ok most of your options really suck.  You can short sale, you can default.  I would try the owner finance thing till it was taken from me. 

I do have one crazy suggestion to try.  Can you find a builder, not a big time builder but a flipper or contractor to develope the property.  You put up the land, form an LP with the builder, and sell the land with a house on it to get yourself out of this deal?  You would place your land valued at 175k into the deal and let the builder do his thing.

It a hail mary but it might just work

to your success

Josh

@James Floyd

There are some other options besides short sale and foreclosure.

Two would be either a cram down or mortgage satisfaction.

1.  In a cram down the lender agrees that the value has declined through no fault of your and reduces the principal balance to be more in line with current values.  Say a reducing the mortgage balance from $110,000 to $40,000.  This would not be a short sale or a foreclosure and would be am agreement between you and the lender.  Your arguments to the lender include that this approach is better for THEM than either a short sale or a foreclosure.  

2.  Mortgage satisfaction is not as remote or unthinkable as first glance.  I know several investors who have received mortgage satisfactions from lenders like Wells Fargo and Ocwen, essentially giving them the property free and clear and no negative on their credit report.  The argument here is that you've paid already $65,000 on the property plus taxes and insurance and the property is only worth $40,000.  You need to present this to the lender as a lose lose situation for THEM.  Values have declines and are not rising, few lots are built on, and its a ghost town.  If the lender becomes the owner they are going to have considerable problems, essentially all your problems on top of their situation.

3.  A third option would be a deed in lieu of foreclosure, where you deed the property to the lender voluntarily in exchange for no deficiency judgment against you.  In all three scenarios you need to stress how bad the situation is for them and how much worse it can get for THEM.

In all three cases they will probably want a certified appraisal which you should be more than willing to pay for.

Lets us know how it works out for you.

I do feel your pain.  I recently sold a lot for 60% less than I sold the lot next door in 2008.  I've owned hundreds of tract of land and what you realize but most people don't is that lots were much harder damaged in the Great Depression of 2008 than either houses or apartments!  

I had similar issues in Florida bought a lot for over 500,000 I build spec homes but market crashed before I could build that one. Lots were selling for as low as 120,000. What I did was to build my own personal home cost to build 320,000. Your able to convert lot from business asset to personal at Fair market value and take tax loss against other capital gain. Then live in home wait till appreciation pulls you out. Your tax bases will be low because write down but does not matter because capital gain on your personal home not taxable up too certain limitations. My home now up to about 650ish so I'm still down about 180 but moving we're moving in the right direction. Plus the tax benefit has soften the blow. Good luck

@Josh Caldwell  Why would a builder pay 4x as much for the lot as it is worth? They wouldn't. Account Closed You might get the lender to accept a deed in lieu of foreclosure. 

  Thanks everyone!. I'm going to use all the great advice and push hard for a resolution to this sinking ship. I've always been able to make the bills, pay the loans and still have a comfortable savings. Since I started looking at the world through an investors eyes (thanks to Mr. Kiyosaki) I realized I was the sucker making money for others.  I will chalk this money pit lot up as a learning experience and move on to better investments.

When I do finally get this resolved I will share the story with everyone on PB.

Thanks again,  James

Karen it is admittedly a hail mary play.  You would need to find a rehabber or general contractor to partner with.  The reason that they would consider it, is that it will be easier to raise the funds to build the house with the property thrown in as part of the partnership.  You arent looking for an experienced flipper who can make more money doing their own deals.  To make this work, you need a contractor who wants to learn real estate and who will accept a smaller profit in this deal to learn how this works. My rehab business was built when a very experienced general contractor approached me to teach him how to do his own flips.  Now that part of my business has 20 employees and is working on 5 flips at the moment. 

All of the easy options suck, to make my suggestion work you need the right contractor, and you need him to want out of the daily grind. 

In an equestrian community is there some way to get the land performing?

For example put up a fence or barn and have a housing facility for horses for the community. The income you bring in could outweigh your current carrying costs.

If you do not want to do that what about owner financing the land or doing a ground lease on it and let someone else put up the business structure??

If there is timber maybe you could sell some of it off or you could rent pasture land for cows etc. Christmas tree farms, pumpkin farms, land leasing for subdivision outings etc. There are lots of things you could do if it is allowed.

Could you get more for the land broken up?? Example research shows for  a large tract 7 acres average per acre is 10k but people are paying 20k for 1 acre tracts as it's smaller and more affordable.

Krulac's ideas are something to explore as well.

Tire dump, hide the cash, then stick the bank with the mess

@Joel Owens

I doubt the CCR's would allow for most or any of what you allude to.. but in rural lands those are good options.... and being a Timber guy myself of course logging timber is near and dear to my heart.

First thing I would want to know is who the lender is... is it even an institution that reports to the cred agencies... if its not on your current credit report then you do what David suggests and cram them down ,,, or walk away etc etc.

building lots are great until they are not.. and when they are not they can fall like rocks. When I was in Atlanta a few years ago buying homes.. I saw pipe farms were builders were picking them up for 1 to 2k a lot.. I bought one little sub of 15 for 30k... but could not raise any money to save my life.. everyone said there is no cash flow..  Well those lots sold last year for 25k each... not bad for 2.5 years. 

for this person.. it sounds like he either pays it off or goes to the mat with the lender or just keeps making his payments... I do like the build a personal resi on it though.. I did the same thing here in Oregon.. I bought 2 lots for 460k and was going to build my home on them well 08 hit I could not build and I had to ride it out because there was a home on the property I got a conventional loan  and it was on my credit and I demo'd the house like 6 months before the crash.. so I paid 3k a month on those lots for 7 years.. one house I built and got in effect 250 out of the lot.. and I now live in the second home.. When I built the home a year ago the appraisal for the construction loan was 610k.. when I refied at the end the apprasail came in at 875k.. so I think with the buy and build a personal resi I might just break even !! plus I love the house and have very small loan on it.. so its far cheaper than rent even.

@Karen Margrave I might have sounded like I was putting down short sellers, but if so my fault I should have been clearer. 

Tough times breed tough people and also build character.  If it was easy to short sell that would most likely have occurred years ago.  There could be more reasons that is not an option.  

I missed some payments on all kinds of bills at that time, and that's not something I loved to do, but paying late or short selling are not dishonorable that is a strong word.  I know plenty of people who lost houses and some of them a primary.  I did not and will not call them dishonorable. I hate to hear those stories, I'm sure we could trade stories of friends and family who lost nearly all at that time.  

I know people who short sold and now look at that propery above what they bought it for and wish they had held on, many tried everything they could but still had to let go.  

When I realized what a bad position I was in in 09 I had a full time construction job.  I had been a bartender but the doctor tod me either one or the other both, and I would be back in surgery.  Even then he said wait 4 months to go back.  I went back in three weeks and was in pain all the time. I knew I needed to make more money than my one job paid. I negotiated a deal with a commercial landlord to represent them in short term rentals.  I worked nights 48 hours a week in construction and 40-50 hours in the building.  My wife though to leave me at times.  But fortunately we made a ton of money in 09-12. The company is called 82mercer

I used that money to buy a short sale I live in now.  The guy who owned the short sale house lived in the house next door.  Mine was his rental. We are on 50x100 lots so I can touch his house while I'm watering my lawn.  Neither of us is dishonorable, he's a good neighbor and I hope he feels that way about me.  

Today I own two business' outside of real estate one is clothing(I'm a silent partner but I used to be active)the other is construction.  Not every transaction is a winner but both are profitable. My business is not about a single transaction, just because something is losing now doesn't mean it will always lose.  Investing is about more than money.  Its also time, and more. I know many contractors who have lost money completing jobs and I am one of those.  

Everyone gets to make their own decisions not saying who's right or who is wrong.

Answer me this.......the bank isn't selling furniture to pay the difference in a short sale.  So who pays for the loss? 

In many transactions there are people who make and people who lose. I'm not so sure what would happen if it became completely acceptable to walk away from any transaction you were in and pass the liability to whoever. 

 If you have no choice do what you need to do with a clear conscience, you did your best.

Account Closed  There may never be a loss to the bank, as most of the banks are sitting on their foreclosed properties and let them trickle back out to the marketplace as values go up. On the other hand, borrowers didn't get the bailouts the banks did, nor did the borrowers have any way of stopping what was happening with Freddie and Fannie, that was 100% the politicians, therefore; why should borrowers have to pick up the tab for their incompetence. You won't get any sympathy from me for the banks. 

The banks could have rewritten every loan they had on real estate and extended the term for another 10 years or so and it would have stopped the housing crash, instead they sat back and did nothing, with no care whatsoever what it would do to the country. 

We are now entering the buying season!  What building is going on? Spec or custom?  If you have a couple going on then its a much safer time for you to spec build. I would seriously consider splitting into 2 semi-equal lots. Almost 3+ acres per lot is still good. Find a good local bank and a contractor that can partner on the spec build. Are the finished homes selling for more $400k? Find the top agent around and get them on your side.  They might be a builder too.  Many builders are licensed agents or related to one.  You are still in a great position. Just make sure and get 18 SEER HVAC systems for that Florida heat!

FYI, you'll have to qualify with a financial hardship, as in an inability to pay your mortgage, to qualify for either a short sale or DIL.

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